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Overturning the Federal Applecart

A strange story came out of Washington last week: Fannie Mae and Freddie Mac -- the huge companies that buy most conforming loans from local lenders -- agreed to tougher standards for appraisers.

Under the deal worked out with New York state attorney general Andrew Cuomo, the big loan buyers agreed to create a "New Home Valuation Protection Code " which has three baseline requirements:

Mortgage brokers will be prohibited from selecting appraisers;

Lenders will be prohibited from using "in-house" staff appraisers to conduct initial appraisal, and

Lenders will be prohibited from using appraisal management companies that they own or control.

At first all of this may seem like technical gibberish, but the benefits to borrowers -- and to lenders -- are huge. Cuomo is effectively removing potential points of conflict, opportunities where appraisers can be pressured to over-value properties.

As a borrower you want a conservative appraisal to prevent overpaying for a property. As a lender you also want conservative appraisals to avoid loans which are too risky -- say the loans most likely result in late payments, no payments and foreclosures.

Fannie Mae and Freddie Mac are government-sponsored enterprises -- GSEs -- former federal agencies that are now private companies overseen by the Office of Federal Housing Enterprise Oversight (OFHEO). Under the deal with Cuomo, Fannie Mae and Freddie Mac will require lenders to follow the new appraisal guidelines -- and this is where it gets interesting.

Since the National Bank Act was enacted in 1864, the federal government has exclusively regulated national banks, credit unions and savings and loan associations. States have had little or no say under this arrangement, but now Cuomo has opened a kink in the federal monopoly.

Cuomo, a former HUD Secretary under President Clinton, has effectively found a way for states to impact federally-regulated lenders. This is a clever bit of legal magic, but it's also something more: It raises the question asked by more and more homeowners in wake of today's massive foreclosure levels: Why didn't federal regulators enact such obvious standards before the mortgage marketplace came apart?